What is the SMSF 6 month rule?
The SIS legislation provide a 6-month grace period to restructure the SMSF trustee when circumstances change.
Why is this important?
SIS requires an SMSF to satisfy and continue to satisfy the definition of a self-managed superannuation fund, as outlined in s 17A, to ensure it retains its complying status and can receive concessional tax treatment.
One of the key conditions to satisfy the definition require that all members must also be trustees or directors of the corporate trustee. There are some limited exceptions.
If an SMSF ceases to satisfy the definition of an SMSF it must:
- restructure the fund in order to meet the definition, or
- appoint an independent licensed trustee regulated under APRA, or
- wind up the fund.
An SMSF failing to do the above can be made non-complying, losing its tax concessions and face 45% tax on its income including the market value of assets (less the total of non-concessional contributions) held at the start of the year.
What are some of the exceptions to the basic member/trustee rule?
A sole member fund is a major exception. It can have:
- a sole director corporate trustee being the SMSF member; or
- The corporate trustee can have two directors with one being the SMSF member: or
- The trustee can have 2 individual trustees with one being the SMSF member.
A legal personal representative (LPR)- executor of the member’s estate- is able to be appointed and step into the shoes of a member who has died. A child under 18 is under a legal disability and unable to legally be a trustee/director can have a parent step in at the trustee level on their behalf.
A member who has appointed an attorney under an enduring power of attorney (EPOA) can be appointed and step into the role of trustee/director in circumstances such as:
- the member becomes incapacitated – could be due to ill health or mental health -dementia becoming a growing concern as the population ages
- a member transferring overseas for a prolonged period of time may not meet the residency rules
Hint – a trustee who is disqualified cannot have an EPOA step in as trustee/director on their behalf. An undischarged bankrupt is a disqualified person.
When can the 6-month grace period be applied?
- A child reaching the age of 18
- Ceasing membership of an SMSF
- Member becomes incapacitated
- Death of a member
- Divorce or de facto relationship breakdown
- Member/trustee/director becomes disqualified
The grace period does not apply to new SMSF members. As a result, membership appointments and trustee or director appointments are required to occur on the same day.
The benefit of the 6 month grace period
As our SMSF population ages death is an issue facing a larger proportion of our funds. It is a period when the spouse is grieving and restructuring the trustee of their SMSF is not on the top of their to do list. This rule thus is of great benefit for SMSF estate planning.
The 6 month grace period to allow the surviving spouse time to attend to decisions about their SMSF is crucial. The spouse may want to retain the fund or possibly wind it up.
Example – Restructuring the trustee after the death of a member
Sadly, Ken died on 1st February 2025 and Betty is the surviving spouse. Betty and Ken were the only members of their SMSF and the directors of the special purpose trustee company “Betty & Ken Pty Ltd”.
Betty is now a sole member and if she wants to retain the SMSF and the current trustee she needs to restructure the company. She seeks professional guidance and is advised she can retain “Betty & Ken Pty Ltd” as the trustee of the fund, but she has to:
- Remove Ken as director – depending on the company’s constitution – and appoint a family member or a friend who is not an employee of Betty as a director of “Betty & Ken Pty Ltd”
- Remove Ken as director and provided the constitution of “Betty & Ken Pty Ltd” allow a sole director, Betty can continue as a sole director and the sole member of the SMSF
To ensure her SMSF continues to satisfy the definition of a SMSF the restructuring of the company must be completed by 31st July 2025. It is important to comply with ASIC rules and timing to remove and appoint a director of the company.
Normally, Ken’s death would cause the SMSF to breach SIS rules since not all members are trustee directors. However, the 6 month grace period permits the fund to continue with two members and one director temporarily. Even with individual trustees, Betty’s SMSF could operate with just her as the sole individual trustee for this period. Some banks may see this as an issue due to unfamiliarity with SIS rules and request immediate changes. We can contact your bank to clarify the situation if needed.
Please seek advice from your SMSF specialist and legal adviser in relation to removing and appointing directors or appointing a LPR or an EPOA to ensure compliance with legal and SIS requirements as the process can be complex.